Hong Kong Banks Increasingly Exposed to China Economy

October 29, 2011

“Banks in Hong Kong have historically been among Asia’s best-run, best-capitalized financial institutions, often the envy of their peers. But now, with China’s economy slowing, bank margins are under pressure, deposit costs are rising and there is a liquidity squeeze, warns Nomura Securities Daniel Shum.”

Bank loans in Hong Kong grew by a whopping 26% in August year over year. Rapid credit growth is often a harbinger to credit-quality problems. Ismael Pili, a bank analyst for Macquarie Securities, attributes much of this loan growth to “trade finance and Chinese companies that are borrowing in Hong Kong for operations or assets overseas.

Trade financing by Hong Kong banks grew 102.3% in the first half of this year, compared with the total in the corresponding period last year. And loans outside Hong Kong grew 37.9%. “These are scary numbers because we have never seen Hong Kong banks grow loans to non-traditional sectors this way or as fast,” says Michael Werner, a Sanford C. Bernstein analyst.

HS : “Dim Sum Bonds are the new subprime” is something that’s been mentioned in this space. Unable to get bank loans, or unwilling to pay triple digit black market rate, companies have been going to Hong Kong to fleece foreigners looking for a way to play a perceived one way bet on China’s currency.

Since this is the debt rejected by all, it is the lowest rung. It will only take one major bankruptcy to create a crises of confidence and for this buying to morph into equally strong selling.